Macro Review: When the Old Job Creator Stops Working

The export sector's role in creating jobs is coming to an end. Stronger domestic consumption could be the savior for job seekers.

By staff reporter Zhang Hong

From
Caijing’s online edition

The slowest rate
of growth of China’s economy in a decade is not
necessarily a big worry, as 8 percent – the figure
predicted by most
economists for
2009 –
is still the envy of
many. The real source
of anxiety comes
from the prospect of job loss.

Through
export-led growth,China has
managed to generate massive increases in employment. In the 10
years leading up
to 2007, some
9 million urban jobs were created
annually. Research published by the U.S. National Bureau of Statistics indicates
that export growth has been responsible for one-third of jobs created in
China between 1997 and
2002.

According to
estimates by Caijing's Chief Economist, Shen Minggao, export-focused companies employed nearly
18 million people in 2007. Furthermore, for each percentage point increase in
exports – in local currency
terms – employment increased by 0.3
percent, or 230,000 jobs.

However, the
job-creating power of the export sector has been weakening. A survey among
export factories found that their employment growth had slowed to 11 percent in
2007, down from 28 percent in 2005.

The reason is
that the proportion of heavy industry in the export sector has been increasing
compared to that of light, labor-intensive industry. In fact,
it more than
doubledlight industry
in the last 15
years, growing at a
rate between 40 and
50 percent. Furthermore productivity has increased as private firms, who
typically are more effective at cost savings and maximizing labor
efficiency, than state-owned enterprises,
have increased their share of the export market.

Now that export
growth has slowed significantly, there is a real risk of large layoffs. If we
assume that export growth for 2008 will be 11 percent, as it was for the first
three quarters this year, and that factories had planned for 20 percent export
growth, the 9 percent gap could result in a 3
percent drop in employment growth as per the relationship mentioned
earlier.

This does not
take into account the fact that if companies cut back on investment or reduce
output in response to the gloomy outlook for the market, even more jobs could
disappear. Pressure from the market may also make companies strive harder to
increase efficiency and upgrade technology to further cut production costs, and
jobs.

For
2009, the outlook could be even worse.
Growth in China's main export markets is slowing or might be in recession, as
demonstrated by the reduction in contracts signed at the autumn Canton Fair,
China's most important foreign trade fair. Damage to exports may be even further
aggravated if the yuan continues to appreciate, as suggested by the increase in
the nominal effective exchange rate from 108.32 in September to 112.1 in October reported by the Bank of
International Settlements.

If that is the
case, exports could well stagnate or contract next year, meaning that the
supposed 4.6 million jobs that the
export sector
would create
under good
conditions
would vanish
completely.

The government’s
4-trillion-yuan stimulus package, loose
monetary policy and tax-cuts for exporters might support the export sector for a
while. However, the apparent emphasis on investment is hardly a blessing for
employment.

Intensive
investment could actually substitute, rather than promote labor. The reason is
that, given the context of cheap money
resulting from government-controlled interest rates, even if private companies
can do a better job than SOEs in allocating resources, the low cost of financing
might encourage them to invest more in heavy industries that employ fewer
workers than otherwise.

The most
effective way to support the labor market is to encourage domestic consumption.
Consumer strength means greater demand for labor-intensive products, providing
alternative markets for companies frustrated by weak foreign demand. More
importantly, the service sector should be further deregulated, as it can not
only supply future consumption, but can also take over the role of the export
sector as a driver for creating new jobs.

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